In a few short years China’s patent system has gone from an IP rights wannabe to one of the most responsive and patent-friendly systems in the world.

Leading U.S. IP experts say that underlying this rapid evolution is a desire for China to become a science and technology powerhouse, with the ability to create new and formidable industries that employ many of its 1.4 billion people.

“China wants to be an innovation leader for multiple reasons,” Irv Rappaport, former Chief Patent Counsel at Apple and National Semiconductor, who served on the Uruguay Round of GATT, told IP CloseUp recently. “It is fascinating to see how the U.S. patent system is imploding, while the Chinese system is exploding with activity and purpose.

“For more than a decade the U.S. has been emasculating its patent system, while the Chinese have been studying it and adopting the benefits of a well-coordinated and fast-moving one. The U.S. has gone from being on the global cutting edge in IP in the 1990s, to becoming a patent backwater, because of a well-heeled, anti-patent faction among technology companies that want to stifle competition.

“Train Wreck”

“China has watched the U.S. train wreck and is moving fast to fill the void,”continues Rappaport. “It wants to become the world’s ‘Eastern District of TX,’ that is, a fair and fast adjudicator of disputes that respects patent holders’ rights. China will soon be the world’s largest economy with the biggest population and a middle class the size of England, France and Germany combined. Their commitment to innovation can not be ignored.”

Peter Holden, CEO of ipCreate and former managing director with London-based Collar Capital and a founding executive with IP Value, has worked extensively with Asian companies and patents. He has traveled to Korea, China and Japan more than 100 times over the past twenty years. “The Chinese have learned from the U.S. and are sincere about making their IP system the best — one that will encourage innovation and help their nation to become the economic leader. It is not merely a thought. It’s an idea that they are dedicated to.

“China’s attitude towards foreign patent enforcement may not always be as generous as it is currently. It knows that it needs to bend over backwards to be fair if it is to be taken seriously on a global scale. To encourage competition there needs to be a level playing field.”

Counterfeits Still Rule

But China’s record on counterfeits is poor, with everything from luxury goods to pharmaceuticals sold domestically and exported globally. According the U.S. International Trade Commission, Chinese theft of U.S. IP in 2009 alone cost almost one million U.S. jobs and caused $48 billion in U.S. economic losses.

“Counterfeit goods are still an issue for China,” says Erick Robinson, a patent attorney in Beijing and author of Defending a patent case in the brave new world of Chinese patent litigation, in the current issue of IAM magazine. “However, sales of fake goods are no longer openly accepted and the government has been on the war path trying to stop them in different ways. Authorities know that in order to be taken seriously about IP rights, they cannot ignore the problem of counterfeit goods.”

China is just beginning to build its giant tech companies. They have succeed with Alibaba and Huawei, and acquired Lenovo from IBM, which is now a $45 billion (USD) business. Their big businesses currently have less to lose from strong patents and quick dispute resolution than those in the U.S. and Europe. To create successful businesses and attract investment, incentives need to be provided, and strong patents and a reliable legal system for adjudicating disputes are great for encouraging that.

Perhaps when China has as many big tech players as the U.S. it will start to think more defensively, but for now it is the perfect setting for encouraging new ideas with strong patents and courts that make it easy to obtain injunctions.

“It’s interesting that the Chinese are encouraging large foreign corporations to sue non-Chinese companies in China,” opines Rappaport. “This suggests that they are looking to become the patent litigation go-to jurisdiction.” As their innovation grows and becomes more complex, I believe they will have less interest in exporting cheap knock-

offs. Their IP path is similar to that followed by many of today’s developed economies, such as Japan and South Korea. You start off copying others and gradually move to internal innovation.”

Despite China’s success in facilitating stronger patents and more decisive courts, a huge question is just how prominent a role will patents play in new companies in a data-driven information age.

“Given the accelerating pace of technology development and nature of discoveries, which are frequently software driven, it’s not clear whether existing patent systems can remain relevant in the longer term,” says Rappaport. ” This effect may partially explain why patents currently seem to be less relevant in the U.S. It remains to be seen whether this is a longer term development. It is a development that needs to watched.”

“100% Win Rate”

“Trust the Chinese government to do what is best for the Chinese people,” reminds Beijing-based Robinson. “It’s less about assisting foreign patent holders than establishing a really viable IP system that encourages innovation and growth, and that attracts foreign investment. Forty-percent of the smart phones in India are currently manufactured by Chinese companies. Innovation coupled with enforcement will drive China’s new businesses and help them grow.”

As reported by Robinson in IAM, “foreign plaintiffs notched a100% win rate [65 – 0] in civil cases heard by the Beijing IP Court last year, according to a judge who has been on its rostersince it was established in 2014.”

Wake-Up Call

A decade of weakening has taken its toll on the U.S. patent system and patent holders. It will not be quick to recover unless a concerted effort can be made to take IP rights seriously. Allowing U.S. patent policy to be dictated by those with the greatest financial success and market share may be appealing to shareholders, but it is not necessarily what is needed for the nation to remain competitive in a global economy, and to generate new businesses and jobs.

Hopefully, the wake-up call comes soon for the U.S. and it can retain the title of innovation leader it has held since the 19th Century but is slipping away.

A few years ago a company whose patents were violated in China had little or no chance of defending its rights.

Determined to move beyond its role as a low-cost provider of look-alike consumer products, and establish itself as an innovation leader, China has learned from the successes – and mistakes – of other intellectual property systems, especially the U.S. The nation of 1.4 billion inhabitants has rapidly emerged as what is currently among the fairest and most patent holder-friendly systems in the world.

A fascinating article in the current IAM magazine, “Defending a patent case in the brave new world of Chinese patent litigation,” details China’s rapid rise from low-cost copier to a patent power, and a nation that has caught the attention of major global technology powers who are often defendants.

Damages awards are relatively small in China, with median awards currently around 35,000 Renminbi or about $5,000, but injunctions, the power to stop a likely infringing product from being sold, are now issued over 99% of the time to winning parties. NPEs, what some U.S. companies refer to as patent “trolls,” are treated fairly as long as they their patents are of sufficient quality and are the companies are generally supportive of Chinese welfare.

__________

Patent litigation win rates, according to the article, average around 80%. Startlingly, foreign plaintiffs fare better statistically than Chinese.

__________

The U.S. effectively ended the granting of patent injunctions in 2006 with EBay v. MercExchange. Now, only operating companies can obtain them in rare circumstances. This removes most of the leverage afforded patent holders. Granted, injunction abuses are a fact of life, and dubious patents have at times been used to enjoin products, costing companies time and money. But without the power to stop a product from being sold, patents have little meaning.

Race to the Bottom

“Largely as a result of the United States’ race to the bottom in terms of patent enforcement, Germany has emerged as a go-to patent jurisdiction, with virtually guaranteed injunctions, quick time to trial and no discovery resulting in a highly efficient system,” writes Beijing-based Erick Robinson, chief patent counsel, Asia-Pacific for Rouse, a global IP strategy firm.

Patent-holder Win-Rates and Median Damages Awards

“Enter China. For years the laughing-stock of all things IP related, the Middle Kingdom was ridiculed for the easy availability of counterfeit handbags, software and DVDs. However, over the last 15 years, and especially in the last two to three, China has put together an extremely effective patent enforcement system. Based largely on the German system and all of its advantages, but with selected portions from US law, China has now become a top forum for patent litigation.”

Unlike most countries which enjoin making, using and selling allegedly infringed products in-country, as well as imports, Chinese law also bans infringing exports from leaving the country. So, for example, if the accused device is Apple’s iPhone, not only can sales of iPhones in China be enjoined, but also exports of the devices from China. This would enable a patent owner to achieve an effective worldwide ban, since iPhones are manufactured in China.

Slippery Slope

With U.S. patent protection significantly diminished over the past decade, and China’s on the rise, the U.S. is on a slippery slope when it comes to stimulating R&D, innovation and investment. It is well on its way to becoming a second-rate patent system, and a slip in disruptive innovation, necessary for the creation of new industries, difficult to measure in real-time, has probably started. Certainly, companies and their stakeholders are thinking twice before pursuing or relying upon USPTO-issued patent protection.

It remains to be seen if China, a continuing source of counterfeit goods that are shipped worldwide, is committed to providing its businesses, as well as those outside of the country, with a legal system that can meet the needs of all business holders, and permit fair and timely resolution of legitimate disputes.

High Win-Rates; Low Damages Awards

China is now the second largest filer in the U.S. and, while its companies have rarely resorted to filing suits in the U.S. against U.S. companies, there is little doubt that it will do so in the future. Technology giants include Alibaba, Xiaomi, Huawei and Lenovo.

China is likely to be more aggressive enforcing its patents than U.S. frequent-filer Japan, which has been reluctant to engage in domestic or foreign patent disputes. (There are some signs that is changing.) Samsung, by far the largest holder of U.S. patents in the world, has shown a greater willingness use its patents for licensing and leverage.

China may or may not be deliberately attempting to embarrass U.S. and eventually surpass its moribund IP system, but the impact is the same. Continued lack of awareness of what IP rights achieve and for whom, and lobbying, has significantly compromised the once-exemplary U.S. patent system. The Chinese are not too new to capitalism not to see this as an opportunity to compete. For the U.S.’ sake, let’s hope it’s not too late to make invention rights a priority again.

Despite dramatically lower patent valuations, some big companies, including under-performing foreign holders, have taken the number of U.S. sales to new highs.

While IBM still leads, over the past three and a half years, it has been joined by IP-conservative firms from Japan, notably Panasonic/Matsushita, NEC and Sony. All four of these companies have something in common: poor recent financial performance.

In the January IAM Magazine, the Intangible Investor looks at the latest trends in patent sales among the biggest sellers. Activity is up and emerging are new leaders, like Panasonic, which leads even IBM in U.S. sales for the first half of 2015.

Analysis conducted by Brody Berman Associates in conjunction with Envision IP, a law firm that specializes in patent research, reveals that “for the three-and-a-half year period from 2012 to early August 2015, the leading seller by far was IBM, with 5,356 patents. Buyers include Google, Facebook, Alibaba and Twitter. In 2014 alone, IBM sold 2,187 patents, the most in any year over the period by any of the 12 leading tech companies analyzed.

“Surprisingly, the number two, three and four patent sellers in the 2012-2015 period were all Japanese companies,” writes this reporter. “Panasonic/Matsushita, NEC and Sony, with 4,203, 2,131 and 1,578 respectively. This is a dramatic shift for conservative Japanese electronics giants, which rarely litigate patents to generate revenue or enable others to.”

Intellectual Venture’s 70,000 patent portfolio appears to contain no patents originally owned by Apple, Google or Qualcomm, as Envision’s findings indicate. Several patents owned by IV investors appear in its portfolio, including those of Nokia, Verizon, Microsoft and Sony. Only 268 of the 19,559 US patents owned by IV were identified as having a litigation history, representing less than 1.5% of the portfolio.

Among the top companies IV purchased from are Kodak (1,057), American Express (643), AT&T (358) and Philips (313) and Ericsson (273).

Lack of certainty and the high cost of monetizing patents are motivating some businesses to acquire impressive looking patents, not necessarily valid or essential ones.

A reputation for innovation or R&D prowess has become a far more valuable asset since the American Invents Act was passed a few years ago.

IBM, among others, has sold unproven patents for tens of millions of dollars to the likes of Alibaba, Twitter, Facebook and Google, attesting to the power of source brand when it comes to invention rights.

In all but a handful of instances, no one gives a hoot about what an IT patent is really worth in the marketplace or even whether it is valid. There is nothing new about securing batches of patents for affect, especially if it is unlikely that they will be enforced and subject to the scrutiny of litigation.

With licensing revenue down and patent sale prices 30% or more lower, there is little motivation for an alleged infringer to take a licence or settle a dispute. The search is on to identify alternative methods of profiting from IP. Drawing upon a portfolio or family’s implied value can have more meaning than its actual worth — which is becoming increasingly more difficult to establish.

As Good as Gold

In the current (November) IAM The Intangible Investor looks at “Perception is reality for some patent holders.”

A golden reputation for innovation is easier to establish than value for most individual rights. Thus, a patent portfolio or family in conjunction with a recognizable brand can constitute a formidable pairing. “Perceived patent value” holders, those with a
reputation for innovation, may be in a better position to profit today than business that actually hold valid and infringed patents. Proven patents need to survive the PTAB and perform in court, and require capital to monetize; a reputation for IP can be built over time and managed.

We may recall the Intel Inside® advertising campaign of a decade or more ago that touted the branded processor inside the PC. It not only encouraged product sales but provided the company with the ability to license at a premium the patents covering the component.

There was less a qualitative difference in the microprocessor (vs. say AMD’s) than an implied one based on Intel’s consciously cultivated, and largely deserved, reputation for innovation. If issued patents are even less reliable than in the past, then invention rights that appear to be good are the biggest winners. It is no coincidence that the most significant R&D spenders also happen to be among the world’s most valuable brands and significant patent holders. The top ones exceed or are just under $10 billion in annual R&D spend.

Reputation, whether it is deserved or not, makes buying decisions easier — a welcome relief to at least some cash-rich buyers in the market for coverage who cannot wait for patents to issue.

The full IAM piece, “Perception is reality for some patent holders,” can be found here.

In the days preceding what could be the largest U.S. IPO ever, Alibaba, the Chinese e-commerce giant, has been buying patents as well as filing them in an attempt to establish a stronger IP presence.

According to Bloomberg News, Alibaba’s pre-IPO patent buying is part of a larger move on the part of some e-commerce companies to “bulk up” with IP rights for defensive reasons just before or after they go public. (See video here.) However, the source and value of these patents indicate these moves may be more style than substance.

Bloomberg News may be right to suggest that these unproven companies need intangible assets like patents to justify their high valuation. However, it’s unclear if acquiring these untested patents really does provide a meaningful competitive advantage. Patents with an apparent pedigree are not necessarily quality patents, but for some they may provide sufficient freedom to operate. (Click on either image below to see Bloomberg News clip.)

The news service reports that Alibaba has bought 102 patents, 20 from IBM, and has some 300 pending. Perhaps more important, Alibaba is 24% owned by Yahoo!, which has 1,500 patents, presumably those with relatively early prior art in e-commerce.

Twitter pre-IPO has just 9 patents and had been saying that it would not enforce them. Post IPO through and an acquisition with from IBM it has added 900. (Twitter reportedly paid $36 million for them of about $40K per patent, less than what Intellectual Ventures averages per purchase.)

Facebook had just 12 patents pre-IPO. Following it public offering, it used a relatively small amount of cash to buy 750 (from, guess what, IBM). Google, was somewhat of a laggard, but caught up quickly with two large portfolio purchases from IBM and the Motorola acquisition, which included 17,000 patents and 6,000 applications. Presumably, those rights were more focused on wireless inventions and chipsets.

An interesting pattern is emerging for e-commerce businesses: Raise a lot of money, go to the IBM or other well-known stock room and buy (not license) what they can for whatever price so they can at least appear to be IP competitive. Sometimes, the perceived value of a patent portfolio is as important as their actual value, especially if there is little likelihood they will be tested.

Is it possible that IBM, which is fast becoming the Home Depot IP rights, could have that many meaningful e-commerce patents? I hope not.

The Alibaba IPO is expected to exceed the $16 billion that Facebook had raised with its initial offering in 2012.

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About Bruce Berman

I'm a long-time intellectual property observer, adviser and editor, who is in close close contact with the leading holders and most influential people. I track the latest trends and developments, and monitor patent and other IP transactions, strategy and performance.

Since 1988 I have been working with IP holders, managers, lawyers and investors to properly explain the importance of their assets to key audiences, frame disputes and convey transactions.

My five books, including the IP best-seller FROM IDEAS TO ASSETS, deal with IP rights as business assets. THE INTANGIBLE INVESTOR, the column I have been writing for IAM Magazine since 2003, looks at ways IP rights impact stakeholders. For my complete bio visit www.brodyberman.com or click on the link below.